Wednesday, April 18, 2012

Merrill Lynch is upgrading First Solar (NASDAQ:FSLR) to Buy from Underperform:

Upgrading to Buy – price objective is $30We’re upgrading First Solar from Underperform to Buy, in recognition of the company’s cost reduction efforts and the resulting likely impact both on earnings and valuation. The company still faces substantial challenges, and we still see earnings declining the next several years. That said, we have pointed to excess manufacturing capacity as a problem, and the company has addressed the issue with yesterday’s announcement. Our new price objective is $30.First Solar can’t cut its way to growth . . .

Companies can’t cut their way to growth, and First Solar’s problem with cost competitiveness still exists. We’ve written before that we expect Chinese silicon solar cell companies to have cost in the low $0.60s per watt by halfway through 2013. FSLR’s new, lower target brings the company closer, but we still see the company struggling by the time lower Chinese profit margins and the thin-film selling price discount are factored in. We think that crystalline solar cell prices could be in the low to mid $0.70s by mid-2013, and it’s not yet clear how FSLR intends to cope with that. Yesterday’s move might best be described as taking the pressure off for the intermediate term – fundamental problems remain.

. . . but better costs and a story to tell should get the stock to $30

With the moderately improved cost structure, better earnings outlook and a story to tell, we think that the stock can move to $30. That would reflect a 10x multiple of 2014E earnings, 8.5x current-year earnings excluding expected writeoffs and 8.7x EBITDA. Whether FSLR can make more progress than that depends upon management taking additional measures to return the company to a truly competitive position

The downgrade comes after the co announced it will be mothballing 20% plus of its manufacturing capacity, reducing its workforce and taking multiple charges over the next few quarters. The company says this is in response to dwindling subsidies in Europe but it looks to us like a change in strategy driven by a lack of product offerings.

Key Points

Hole in FSLR product line means lost business and shrinking market share. European solar subsidies have shifted from open field to rooftop. FSLR's product line consists of inexpensive but inefficient solar panels, meaning that in space-constrained areas such as roof tops, customers would get 50% less electricity and less of a payback using FSLR panels versus SunPower (SPWR, $6.18, Buy) panels. As a result it is ceding this market to others.

Strategy lacks barriers to entry. The company is going to focus exclusively on utility scale solar systems and its competency in their design and construction. FSLR claims it can optimize the construction/installation process in a way that preserves margins and differentiates itself from other solar makers. However, the firm does not see how it uniquely adds value digging holes, pouring concrete, and connecting wires.

Cutting 20% or more of capacity. Management said it is going to close the factory in Germany and stop four lines in Malaysia to match demand and supply. But this is simply because it is forced to walk away from the rooftop business. The company says this is beneficial because it will lower costs, but it's also a recognition that it is becoming a niche player. Shutting the plant will cost at least $200 million.

Crawling under a rock won't stop the secular downward margin compression. The solar business is experiencing a decade long downward compression of margins due to falling raw material cost. On top of this First Solar is ceding share and restructuring. So long as its competitors are content to serve this market at a loss, it is going to be very hard to find a niche where it won't find compression. Nevertheless, that appears to be the strategy.

Valuation. Wunderlich's new DCF yields a $14 price target based on lower earnings expectations and lower growth. They project book value will reach $39.73 a share by year-end 2012 but, with an uncertain outlook for FSLR's strategy in the near term not much different from SunPower's or MEMC (WFR, $3.74, Sell), the shares will probably trade lower. They are lowering their rating on the shares to Sell from Hold and reducing their price target to $14 from $38.

Notablecalls: Wunderlich has been cautious/negative on FSLR ever since 2010, gradually cutting their estimates and price target as the stock tumbled.

The easy money has clearly been made on the short side but given the bounce we saw yesterday I think there will be sellers around today.

Note both JPM and Morgan Stanley are out with cautious comments as well.

Tuesday, April 03, 2012

Piper Jaffray's Gene Munster is throwing the shorts a curve ball this morning by upping his price target to $910 (prev. $718) saying Apple (NASDAQ:AAPL) is likely to be the world's first trillion dollar company.

- This is the new Street high price target.

Munster believes shares of AAPL will reach $1,000 in CY14, which would imply a roughly 1 trillion dollar market cap, the first in history. While some investors believe the biggest issue for AAPL to get to $1,000 is the market cap along with excessive investor exuberance, which Munster addresses in this note, he believes the real story is earnings growth. Fundamentally, he believes shares can reach $1,000 based on his belief Apple will continue to win in global mobile devices. As a result, Munster remains confident in his $80.18 CY15 estimate. A 12x multiple (stock's current out year EPS multiple) on his CY15 EPS of $80.18 yields $960; however, this excludes an Apple Television, which the analyst believes could add more than $4 in EPS (5%) by CY15, which would yield over a $1,000 share price (12 * ~$84).

Here are some of the more interesting excerpts from the note:

It's All About Apple Continuing To Win In Global Mobile Devices. Outside of the market cap logic outlined above, we believe the fundamental driver to Apple reaching a $1,000 share price is the company's continued success in the global mobile device markets, which we believe will drive consistent EPS growth. For CY12, we expect $44.76 in EPS, 27% y/y growth. For CY15, we expect $80.18, 23% y/y. The most important market is the smartphone market, where we estimate Apple had 19% share last year, which we expect to go to 33% in CY15, with ASP's going from ~$580 in CY11 to an estimated ~$435 in CY15. Moving forward, we believe the smarpthone market is boiling down to essentially two players at scale: Apple and Samsung. While a wild card is a Chinese manufacturer (Huawei/ ZTE for example) becoming a larger player, we believe Apple and Samsung will be market share winners over the next few years. To better target the 80% of global smart phone users that are pre-paid, we believe Apple will continue on its current progression of selling older iPhone models at lower prices. And we expect this strategy to yield a $200 entry-level iPhone by December of CY15. Given our belief that the smartphone markets will exceed 1 billion units in 2015, we believe this creates a significant market opportunity for Apple. The details for our expectations on overall mobile device growth for Apple are below.

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Why Excessive Investor Exuberance Should Not Be A Concern; Valuation Is Low. As of yesterday, there are 54 analysts covering Apple, of which 47 have either a Strong Buy or a Buy, 5 with a hold, and 2 have an underperform or a sell (Yahoo Finance), with the discussion of a $1,000 share price nothing new to the Apple story. As further evidence of the exuberance, countless funds have made special provisions to own positions in Apple above the funds' guidelines. The bear case is that once something fundamental breaks in the Apple story, these funds will lower their Apple exposure to normalized levels and shares will drop. The reason we are not concerned about this risk is we believe valuation is low relative to Apple's expected growth, which should give support to shares. Despite the law of large numbers, we believe the opportunity in mobile devices (iPhone and iPad) are big enough for Apple will grow earnings by 20% plus over the next three years, while our price target is based on a 12x earnings multiple. The bottom line, while it seems virtually every investor (professional and retail) and analyst has something positive to say about Apple, the multiple on shares does not suggest there is excessive investor exuberance.

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Where Will The Next $400 Billion In Market Cap Come From? We believe there will be enough value over the next two plus years for Apple to add another $400 billion in market cap from a combination of growth in dollars invested in tech and continued shift from major Apple competitors. First, we believe dollars invested in US technology companies will increase ~5% y/y on average for the next three years (CY12-CY14). By comparison, dollars invested in US tech companies were up 9% y/y in 2011. Therefore, the tech sector will add ~$390 billion in market cap through 2014. We assume Apple could capture half of this market cap (from 85% in the 4 years prior). Second, the companies we consider to be the 10 most relevant competitors to Apple (Samsung, HTC, RIMM, NOK, SNE, DELL, HP, MSFT, INTC, GOOG) represent nearly $1 trillion in market cap today. We believe 20% of that value, or ~$200 billion could shift to Apple through 2014. Thus there is potential for Apple to repeat history and add another $400 billion to its market cap. At a $1,000 share price (roughly $1 trillion in market cap) Apple would represent 26% of the total US tech market cap from 17% today.

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What Could Go Wrong? Innovation Slows. The key risk to the Apple story is pace of innovation. While we have not seen anything to make us believe innovation will slow, it is the fundamental barrier that stands between shares at $600 and at $1,000. Apple has won the ecosystem and interface war, and must continue to innovate around its leadership position to grow the business. Going forward, consumer interest in owning future Apple products is a key metric to measuring Apple’s pace of innovation. Our survey work last fall suggested 94% of existing iPhone owners in the US expect their next phone will be an iPhone.

Notablecalls: Note the Morgan Stanley $960 was their Bull case, not the actual PT. Gene now has the Street high price target. The shorts that overstayed the Wedge call are going to be covering now, I suspect.

A mere 3% move would put AAPL to $636.

(FWIW, I still think Wedge is right. But it is what it is. Munster trumps Wedge here).